There are lots of confusing terms in real estate – this is nothing new. There are some that you absolutely must know if you intend to become a home owner, and some you can get away with not knowing so well. However, “contingent” is not one of those words. You should know this one!
When a family is searching for a new home (especially if they are searching online), they will typically encounter a lot of words implying the status of different homes. Of course you will see “for sale” and “closed”, but sometimes you will also run into some homes that are listed as “pending” and “contingent”. All of these phrases are meant to help you identify where the home is in the general sale process. For example, “closed” means that the house is in the final step of executing a real estate transaction. “Contingent” is another one of those words, and the subject of our discussion today.
Understanding the differences between these words can help you identify very quickly which properties are actually still available for purchase, and you will better understand how you should move forward if you are interested in putting an offer down on the home.
Here’s what contingency means – when a home is in the contingent stage, it means that the house’s current owner has accepted an offer from a hopeful buyer and that the offer comes with contingencies before things can move towards closing. That’s it! Contingencies are conditions that the prospective buyer must meet before things can move forward. As an example, a buyer may place an offer on a home, but the offer is contingent upon the buyer selling their current home first or clarifying a negative mark on their credit report. Sometimes, the hopeful buyer is able to rectify the issue at hand and move forward, but sometimes, they are not, and the house goes back to the market.
What does it mean when a house goes from active to contingent? When a listing status is “active”, anyone can make an offer because the house has not received any accepted offers to date. When the status changes from “active” to “contingent”, the home is still technically on the market and in active status, but the family who is in contingency with the seller will have “first dibs”. You can still make an offer, but it will be a back up offer and only considered if the current deal falls through. You will have the chance to move forward with the home in this case.
A contingency doesn’t always mean that the house is for-sure off the market, and you may still have a chance of getting your hands on the keys to a house in contingency – so just because that’s how it’s labeled, you shouldn’t necessarily walk away.
After all requirements have been met as defined by both buyer and seller, and a contract is officially executed, the listing status changes from “contingent” to “pending” and is no longer an active listing. When an offer has been accepted, and the only steps left are the final paperwork and closing is the exact moment that the home becomes “pending”. Unlike contingent statuses, pending status does not mean that the sale is still active, so other prospective buyers cannot place offers on the home.
First of all – Different areas have different rules about contingencies, so you want to speak with your mortgage professionals about it. You may have a better chance of edging your way in on a contingent home in some states than in others. What you read here today is a generalized version of what contingent means for a home.
What can you expect from a home that’s marked contingent? Well, there are five different types of contingencies in real estate, and each one comes with different obligations and requirements. Which type of contingency is in place can tell you a lot about whether the home will end up back on the market or whether the deal will follow through.
Here’s one type of contingency – the Financial Contingency. It’s one of the more common types. Many things can go wrong after a buyer puts in an offer on a house, and those things can affect whether or not they will be approved for the loan they’re asking for. These issues can include taking on new debt, losing or changing jobs, or other issues.
Another thing that can incur a financial contingency? Most of the time, a buyer will seek out and receive a mortgage pre-approval from a mortgage lender prior to submitting their offer, which helps them decide whether or not they can qualify for a mortgage prior to making an official offer on a home. However, pre-approvals can be obtained in minutes these days, and there is little to no fact-checking on them. Just because a pre-approval says one number doesn’t mean that’s the true number that a potential home owner is eligible to buy at. This is referred to as a mortgage contingency and often the buyer is forced to walk away from the home. Either your finances are enough or they aren’t!
If the buyer lies about or enters wrong information about their finances when applying for a pre-approval (such as information regarding their taxes or income), the pre-approval letter basically means nothing. If the interest rates are currently low, this specific type of contingency is easy to bypass and the original potential owner gets the house. However, if interest rates are currently high, people won’t typically get out of a financial contingency.
A sale contingency comes into play sometimes too. Obviously, it is easier to sell a house before buying a new one, but sometimes that just isn’t possible. A home sale contingency allows the buyer a certain amount of time to sell (and settle) on their current home in order to finance their new one. This type of contingency acts as a protection to buyers, so that if they can’t sell their current home, they’re not stuck with a second one that they can’t afford. The buyer can back out of the contract without legal repercussions.
A home inspection contingency happens when a house returns reports of unsatisfactory issues, such as roofing or plumbing issues, structural problems, electrical miswirings, radon test failure, well water testing failure, mold growth, the existence of lead paint, and more. The buyer is the one that places the contingency here – stating that they will only move forward with buying the house if the seller fixes this issue completely in a timely manner. They can also request that the price is lowered because the house is not in pristine condition. The buyer has the option to step away from the deal if the seller does not follow through with their half of the agreement.
An appraisal contingency is generally put in place for a buyer to ensure that they aren’t being ripped off and being made to overpay for a bad house. If the home does not appraise the same dollar amount that the sellers are asking for, the buyer can request a lower price and call it a contingency. The seller then can accept the lower price or back out, meaning the deal falls through. The seller also typically has the option to pay the difference in cash.
A settlement contingency becomes a factor when the buyer already has a contract in hand and a closing date for the home in question. The property can’t legally change to “sold” until the closing date takes place, and the buyer can pull out of the deal before that day. When there is a settlement contingency, sometimes a buyer will accept back up offers in case the deal falls through. If the buyer’s new home closes on the specified date, the contract remains valid. Alternatively, if the home does not close on the specified date, the contract is terminated.
So – can you put an offer on a house that is listed as contingent? Usually, yes. Most homes listed as contingent still allow other buyers to make an offer. The deal isn’t final, so the seller may find it nice to have back up offers if the contract falls through! If you are a buyer and you find your dream house in contingency status, talk with your mortgage professionals about placing an offer on the home. If the seller likes your offer the initial prospective buyer likely be given a few days to change the contingency issue. If they are unable to, their deal will fall through and you will be given a chance to buy the home. Remember – the way contingencies work by law is different with every state, so make sure that you ask your mortgage professional for the fine print on the matter. Don’t give up if your dream house is in contingency – it could still be yours!